Credit, Crises and Inequality

47 Pages Posted: 14 Dec 2021

Multiple version iconThere are 2 versions of this paper

Date Written: November 12, 2021

Abstract

Using a panel dataset of 26 advanced economies over the five decades preceding the Covid crisis, we show that inequality rises following recessions and that rapid credit growth in the run up to a downturn exacerbates that effect. A one standard deviation credit boom leads to a 40% amplification of the distributional fallout in the bust that follows. These links between inequality, credit and downturns are particularly significant for recessions associated with financial crises. We also find some evidence that low bank capital ahead of a downturn amplifies the inequality increase that follows. These insights add a new dimension to policy cost-benefit analysis, at the distributional level. Newly established macroprudential regimes have been empowered with tools to safeguard financial stability by bolstering both lender and borrower resilience. Using those tools may have distributional effects, potentially limiting individual borrowing choices. Our findings make clear, however, that not using those tools can lead to distributional costs, in the event of an untamed crisis.

Keywords: Recessions, local projections, inequality, macroprudential policy

JEL Classification: G01, N10, D63

Suggested Citation

Bridges, Jonathan and Green, Georgina and Joy, Mark, Credit, Crises and Inequality (November 12, 2021). Bank of England Working Paper No. 949, Available at SSRN: https://ssrn.com/abstract=3976327 or http://dx.doi.org/10.2139/ssrn.3976327

Jonathan Bridges (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Georgina Green

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Mark Joy

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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